Delay in govt scheme likely to put off fertilizer firms

The government, which had budgeted for a fertilizer subsidy of a little over Rs.65,000 crore this year, may see the bill balloon to over Rs.1.04 trillion.

Updated: Wed, Jan 23 2013. 01 07 AM IST

New Delhi: A government initiative to allow fertilizer companies to borrow cheaply in lieu of outstanding subsidy arrears may not find many takers, primarily because the scheme has been delayed until the fag-end of the financial year, which will end on 31 March.

India subsidizes fertilizers and the government pays companies the difference between the cost of production and the retail price.

The government, which had budgeted for a fertilizer subsidy of a little over Rs.65,000 crore this year, may see the bill balloon to over Rs.1.04 trillion, according to internal provisional figures seen by Mint. This would leave an outstanding subsidy burden of close to Rs.40,000 crore that is likely to remain unpaid by the end of March.

The bulk of the increase in subsidy is on account of a rise in consumption and the hardening of prices of imported urea and non-urea fertilizers compared with the last financial year. This is despite the government reducing the subsidy on di-ammonium phosphate (DAP) and muriate of potash (MoP) earlier this fiscal.

Non-urea fertilizers are mostly imported either as finished products or in the intermediate form. The non-urea fertilizer subsidy makes up more than half the total outgo.

This money is typically required by companies to meet working capital costs, wage payments and other sundry expenses.

To tide over the cash shortfall, companies typically borrow at anywhere up to 9-11%, said a managing director of a leading fertilizer company who didn’t want to be named. Tarun Surana, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd, said that in some cases the cost of short-term borrowings goes up to 12-14%.

A government official said the scheme, which is being rolled out in the shape of a special banking arrangement, is likely to be implemented only by 1 March.

“Although we had demanded Rs.39,300 crore, the finance ministry has given an in-principle clearance of Rs.22,000 crore,” the government official said. This amount, he said, would suffice to meet all dues up to the end of the third quarter of the current financial year, while the dues for the last quarter would be carried forward to the next fiscal.

He said that the matter was likely to be considered by the cabinet in the first week of February.

Under the proposed arrangement, a consortium of government banks will extend loans at 10-11% to companies owed money by the government. The government would subsidize such loans by up to 8.5%. This would effectively mean that the cost of borrowing for the companies would be to the tune of 2-3%.

The consortium of banks is likely to be led by State Bank of Patiala and the loans will be extended on the basis of a so-called ‘letter of comfort’.

The industry executive cited earlier said that if the scheme was only rolled out by 1 March, industry would likely be unwilling to come forward and avail of the offer.

“Frankly, we were initially hoping that the proposal would get cabinet clearance next week and be implemented by the first week of February, so that we can at least enjoy the benefit for two months, till April, when money from the new budget gets allocated,” this executive said.

“If they give the loan for only a month, at an annual rate of 8.5%, the net benefit comes to just 0.7%. The government may as well not give us anything. We are not beggars,” he said. “A better solution would be for the government to simply pay a certain interest for the duration of delay in payment rather than going through such complex procedures.”

Iffco and its affiliate Indian Potash Ltd (IPL) are together owed a little over Rs.9,400 crore. Iffco holds a 34% stake in IPL.

Surana agreed. “What is the point in extending the loan so close to the end of the financial year? It would be best for companies to hold out till April, when new allocations come in,” he said.